Turning now to the risk assessment. The risk to the growth outlook are to the downside. This is due in particular to the Middle East conflict and developments in Russia's unjustified war against Ukraine. Renewed disruption of energy supplies could cause energy prices to rise further and for longer than currently expected. This would weigh on real incomes, spending, and investment. The worsening of global financial market sentiment and spillovers in bond market could tighten credit conditions. A resurgence of trade tensions between major economies could also further disrupt supply chains, reduce exports, and weaken consumption and investment. By contrast, growth could turn out to be higher if the economy and energy markets were to adapt more quickly than expected to the disruption caused by the ongoing conflict or they were resolved sustainably. Moreover, the adoption of new technologies by euro area firms and spending on defense and infrastructure, as well as reforms to enhance productivity and complete the EU's single market may drive up growth by more than expected.
The risks to the inflation outlook are to the upside. This is due to the Middle East conflict and developments in Russia's unjustified war against Ukraine. The energy shock could intensify further and its effect on other prices and wages could be stronger than currently expected. Gas prices in particular could increase in the event of further supply disruptions or an unusually cold winter coinciding with low storage levels. The longer energy prices stay high, the more likely they are to drive up broader inflation through indirect and second-round effects. Renewed trade tensions could give rise to more fragmented global supply chains, curtail the supply of critical raw materials, and worsen capacity constraints in the euro area economy. Extreme weather events, potentially reinforced by intensifying El Niño conditions in the unfolding climate and nature crisis more broadly, could drive up food prices by more than expected. By contrast, inflation could turn out to be lower if ongoing geopolitical conflicts were resolved sustainably or if indirect or second-round effects on the recent energy price shock proved less pronounced than anticipated. More volatile and risk-averse financial markets could weigh on demand and thereby lower inflation as well.
Market interest rates have increased since our previous meeting, reflecting similar moves in global markets. Following our interest rate increase in June, bank lending rates for firms have risen to stand at 3.8% in June and July from 3.6% in May. The cost of market-based corporate debt grew to 4% in July, similar to previous months and well above its level before the conflict in the Middle East. The annual growth rate of bank lending to firms, which usually responds to changes in monetary policy with a longer delay, increased further to 4.4% in July from 4% in May and June. The annual growth rate of corporate bond issuance was 3.4% after 3.6% in June and 3.3% in May. Mortgage rates were unchanged in June and July at 3.5%, while mortgage lending growth softened to 3% in July from 3.1% in May and June.
In conclusion, the Governing Council today decided to raise the three key ECB interest rates by 25 basis points. We are committed to setting monetary policy to ensure inflation stabilizes at our 2% target in the medium term. We will follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance. Our interest rate decisions will be based on our assessment of the inflation outlook and the risks surrounding it in light of the incoming data and the dynamics of underlying inflation and the strength of monetary policy transmission. We are not pre-committing to a particular rate path. In any case, we stand ready to adjust all of our instruments within our mandate to ensure that inflation stabilizes sustainably at our medium-term target and preserve the smooth functioning of monetary policy transmission. We are now ready to take your questions. Thank you.
The first question goes to Bloomberg.
Thank you. In July, you said the ECB's reaction function is well understood by markets. Today markets are pricing three hikes following today's move. Would you repeat what you said in July, and is it fair to say higher inflation projections mean that the tightening cycle isn't over yet? On your own future, there are consistent media reports you have expressed your willingness to take over as chair of the World Economic Forum. Are these reports accurate? Do you intend to leave the ECB early or stay until the end of your term? Thank you.
You give me a chance to yet again give what I like most, which is framework guidance. That guidance is encapsulated in the three key pillars we use, which is the inflation outlook with the assessment of the risk, it is the underlying inflation, and it is the transmission. Those are the three pillars. We do that on the basis of the analysis of the shock—in the present circumstances, predominantly supply shock of which we analyze the intensity, the duration, and the propagation. We do that on a meeting-by-meeting basis, and we are data-dependent. You have heard me say that ad nauseam to your taste, that this is what we stick to and this is how we operate. Markets do what they have to do, and we do what we have to do, which is to provide price stability, which is the 2% target in the medium term.
When I talk about framework guidance, this is what I'm talking about. I'm assuming markets find it helpful to determine the path that they understand. But they do their job; we do our job. I can assure you the entire discussions we have had today were focused on today's decision. We have not actually debated at all any kind of future path, the likelihood of this or that. We are dead serious about the framework we observe and that we want to collectively respect. I will say this: when there is something to report about me personally, you will be the first one to know, after my grandchildren. And there is nothing to report.
The next question to Hannah Baker of Reuters, first row.
Good afternoon and thank you for taking my question. You have talked about the rate path—you have not talked about the future rate path. You are now at the top end of the neutral range of the interest rate. Has there been anyone in the Council who has talked about moving into restrictive territory or the need for it? That would be the question: how do you go from here?
You might try multiple angles to get me to identify the next move. This is really not the point. I can assure you that we are not taking a view as to which direction we go at our next meeting. Why is that? I will come back to the neutral rate for a second. Why it is, because—you have a second question? Why don't you give it to me at the same time. They have to put their questions at the same time, so tell me.
Projections are above target in the inflation range. Wouldn't that mean you have to hike in the next couple of years again to make sure you reach that aim?
OK. I will go back to the answer I was giving you for your first question. We don't focus on the meeting and on the data to annoy either you or the observers of the analysts. We do it because we are in this uncertainty that can change things almost overnight. I'll give an example: the refining margins. If I had talked about the refining margins six months ago, we would not have known what we are really talking about. Now, whether you call it the crack spread or the refining margin on liquid fuel, we all know what it's about, and we all know that diesel is used by a category of economic actors. We know now it is yet another bottleneck. But those things happen as a result of multiple geopolitical changes, as a result of supply chain reorganizations, as a result of adjustment of the economy. And because we have that level of uncertainty, we simply cannot anticipate what exactly will be the next move. You could argue in the present state, assuming that nothing changes, we should be doing this and that. This is not how we are trying to address the issue of price stability. We are focusing on what the data delivered today, and we are ready to demonstrate the appropriate agility in whichever direction it is needed, OK? I hope I am clear on that.
The second point you raised is this issue of the upper end of the neutral rate band. This neutral rate band is work in progress on a constant basis, right? It is produced by staff, and they have delivered a band that they consider as the neutral rate band. But this is highly conceptual, because you cannot actually pinpoint the neutral rate because it is a factor of multiple variables that change over time and because it is supposed to be defined in times of no shock. We are constantly under shocks. We are not attaching great importance in the current circumstances to the neutral rate.
And your second question, because I do not want to leave you frustrated because I did not address your question: you say our projections are not at target. So the decision we took today, which was a unanimous decision, was a no-brainer, right? What we will have to do in the future will be determined at each and every meeting. What I can tell you, and this is in the monetary policy statement, is we are determined to deliver on our target.
Thank you for taking my question, President Lagarde. My first is on the bond yield. We are seeing a rise in bond yields. We can look into the States, Japan, Europe. How concerned are you about that development? Do you factor that also into future monetary policy decisions because there is a tightening through the capital markets? My second question would be on the outlook for inflation. If I compare your statement and the communique from July to this one now in September, it sounds that the alertness of the ECB has risen over the concerns about the future inflationary development. Is that the case? Thank you.
Thank you very much for your questions. On the bond yield, it is a phenomenon, as we indicated in the monetary policy statement, which is taking place across global markets. It is not a euro-specific issue. It is happening across the world, and it is a factor of multiple causes. I would mention as the obvious one, supply and demand. When you have a significant financing need arising out of, for instance—I will not say hyperscalers because I think that is narrowing the economic sector that is concerned. Any AI-related activity at the moment is a potential consumer of financing. Whatever form it takes, it will not be restricted to equity; it is moving clearly in the bond and private credit area as well. That is a key driver of what we see. Then there are fundamentals having to do with the economy. I would venture that the U.S. market, which is so large and so liquid and such a driver, is also playing a role. Having said all that, it is incorporated in our projections, taken into account, and we are obviously monitoring attentively what is happening on the markets and the long end of the curve.
On inflation, thank you for asking that question. It gives me a chance to explain what we discussed over the meeting and how we see things. We have been, in a way, surprised at both ends. That is the reason why we have revised our projection for growth as well as for inflation, all different timing. We have been surprised by the resilience of our economy. We had anticipated in previous projections that growth will be lower than what we are seeing and what we are projecting. We move from 0.8% to 0.9%. If you factor the numbers released post cutoff date, it is actually more than 0.9%. Q2 was 0.6%; it came as an upward surprise. If you factor that number into the projection—that is not a projection because the cutoff date was earlier—it is more than 0.9%. We have been surprised in a way for good, because growth is stronger than we had anticipated. The economy is adjusting better. We have been surprised on the inflation front because we have seen inflation, in a way, lower than we had anticipated. This is particularly the case for food. But we believe inflation will be longer-lasting than we had anticipated. You have these two phenomena: more resilience, better adjustment of the economy, lower inflation, but longer-lasting. We are adjusting our projections on that basis.
Thank you. You mentioned the digital euro. Would that be such a high priority for you without Donald Trump, who has repeatedly shown how vulnerable Europe is through sanctions, tariffs, and other economic threats? The second question was, will the test phase of the digital euro start before you leave office?
OK. Thank you for putting the spotlight on the digital euro. As you know, it is a topic and a project that I attach great importance to, ever since the day I joined almost seven years ago. It was then endorsed by Fabio with great talent and great energy, and many staff as well. The multiple reasons it is important: as we move into a world of digital payments, including by private sector actors, we think it's important that central bank money also had a digital shape and form. That is number one. Number two, it has to do with sovereignty. It has to do with not sovereign autonomy, but our capacity to keep control of our currency and keep control of the rail guards on which digital payments circulate. As you know, payment infrastructure is part of our sovereignty. He who does not control the infrastructure is potentially vulnerable. I will say no more on that front. I think I've answered your first question. I'm very hopeful, and it's included in the monetary policy statement, that as early as possible and certainly before year-end, the piece of legislation that is in discussion at the moment will actually be voted upon. I look forward to it, and I encourage members of Parliament to look at it and negotiate as fast as they can: the allocation of fees, the cap, although that is highly technical and quite sensitive. But I hope this is going to be completed in short order so we can then launch the test phase as quickly as possible. We are all working hard on that.
Thank you for taking my question. I have two. The first one is about the Fed's intervention in the currency market, which happened without telling the ECB in advance while the Fed sold euros. Were you concerned about that? What does that tell us about the transatlantic cooperation between the central banks? My second question is about your autobiography, which will come out in January. Your publisher said there would be book promotion events in January and February, I think. How would you make sure the commercial promotion of the book is kept separate from your public role as ECB president?
Lovely questions. Thank you so much. First of all, I'm not going to comment on any FX intervention. I have seen the volume of the intervention, the selling of euros to purchase yens: 500 million euros, OK? Second, any marketing, publishing, commercial operations will happen either on my weekends or on a day or two I will take as a holiday so it is not confused with my ECB duties.
The next question, BFM Business.
By the way, I strongly encourage you to buy the book. It will include nothing on monetary policy. You can do a review of the copy. It will tell you all about my childhood, when I was born, how I grew up, and how a little girl coming from nowhere can become someone without necessarily having been born in the right family, having had enough money, or going to the right schools. I'm dedicating that not only to my grandchildren, but to all the girls that are keen to progress professionally. You really don't have to; you know me, that's fine.
Is it normal for spreads to widen when the higher borrowing costs come from excessive debt and deficit levels? I want to know if you consider it as fragmentation risk. The second question: you said you wanted European voices to be heard in the French presidential debates. A political leader wants to freeze a share; the idea is gaining ground in the debate and some real popularity in the country. You reacted to it, so it clearly matters. What is your take on that proposal? Does it put France and Europe in danger? Thank you.
Thank you for the question. The widening of spread is something I'm not going to comment upon. That is a reflection of how markets perceive the strength, the standing, the value of a particular treasury bond. This is something I'm not going to—we look at all the data points of relevance, but I'm not going to comment on that. I'm not either going to comment on a piece of a political program, but I have to say it is not because you repeat something that doesn't make sense either legally, technically, or financially that it becomes something valid.
Cancellation of debt is covered under Article 123 of the European Treaty on the Functioning of the European Union. It is a pillar of stability, one of the few pillars of stability going forward. It has been agreed to, endorsed, and approved by all member states. That is on the legal front. Anything that would go against the financing of debt in that way would be a pure violation of the treaty. That is number one.
Technically, there have been solid economists, including my former colleague who knows that inside out and can demonstrate easily it is not by taking from one pocket to put in the other pocket that you actually cancel a debt. You don't. You can argue about minuscule moves in one direction or the other, but it is technically not good, if not hopeless. And it is financially dangerous. I'm sorry, but behind any loan there is a lender. If I lend you 1,000, and you come back a few years later saying, 'You know what? I'm never going to reimburse you 1,000, I'm not in good shape. By the way, I might need to refinance something else and need additional financing'—I'm not going to finance you. If I do, I will significantly increase the interest rate I will charge you. Legally, technically, financially really not a good idea, and a large waste of time, however popular that could be in a member state in the euro area.
To the online participants, the podcast company CORE Media. Celia, over to you. You have to unmute; we do not hear you.
Can you hear me now? Good afternoon to everyone, and good afternoon, President.
In June, gas at 60 euro and now we are at 82. How close is the euro area of that becoming the baseline? The second question: do you worry that increasingly interventionist U.S. Treasury policies could bring volatility to European markets?
Thank you for your two questions. You give me a chance to clarify we will be publishing new scenarios. I think it will be published tomorrow or the next couple of days. You will have a chance to see how the scenarios have evolved over the course of this period between June and September. We are producing a benign scenario, an adverse scenario, and a serious scenario. Staff has produced that with great talent. They are predominantly looking at the big source of the shock, which is the price of energy. By varying the hypotheticals, it produces the outcome. It gives me a chance to indicate to you that against all three scenarios, our decision to increase rates by 25 basis points is robust on all three accounts.
Look, financial markets are without borders. They are not without different currencies, they are not without different characteristics, but money moves without borders. Developments that are taking place in one market will have spillover effects and sometimes spillback effects in other markets. Everything that happens on the financial scene has consequences—spillovers, if you will—on markets, and we pay attention to that.
The next question, German Television.
Good afternoon and thank you for taking my question. I would like to touch on the development of inflation and alimentation. We see this type of inflation is relatively low. It does not increase as much as some have thought; it is stagnant, more or less. I'm asking you this because—how do you explain why this sector is not so much affected by the overall development? My second question: you can't comment on developments in member states, but we see developments in many countries. We have a rise in parties that are opposed to the European Union, the eurozone. Some argue we should leave the eurozone; some argue it's an unstable currency. How concerned are you about this rise in the right-wing parties?
Thank you so much. I think I will share that question with my colleague and friend, President Nagel. Very pertinent question about food development. We are all at the table of the Governing Council and are quizzical about the evolution of food prices. As you said, we revised the price for food down relative to what we had assumed. As much as energy prices have increased more than we had anticipated, food prices have increased less: 14.34% to 1.2% for food. We asked ourselves and staff, what is it? You have to distinguish between the processed and the unprocessed food. Processed food increased less than unprocessed food. There are several explanations for all of that.
First of all, unprocessed food that finds its way into processed food has benefited from milder weather conditions in the early part of the year. You can see that coming out in the last few months, certainly in the month of August. Number two, because overall inflation and the energy inflation did not rise as much as we had anticipated, we are not really seeing much of the indirect effects; it is still contained. That is visible in the processed food. Anything that goes into processed food like transportation, manufacturing costs, labor costs—that has not really moved by much. Those are two reasons. There is a third reason that is more anecdotal and coming from data we collect on a frequent basis: it is the slight change to the consumer basket. You see the demand is also evolving, as a result of which the supply cannot necessarily pass through the cost increases that they have to take up. Those are the three key reasons why the price of food is lower than we had anticipated.
I have to tell you that in our projection, we are taking into account higher food prices in the future. We believe if we continue to have this longer-than-anticipated energy shock, it will find its way. Indirect effects are contained in the second-round effect; we are not seeing it, but if it continues it will impact food prices. Of all the elements that we look at carefully to try to anticipate if inflation is going to move upward, this is a key one: the frequency with which suppliers can pass through cost increases, composition of the consumer basket, price of energy—multiple data points we observe. I will simply say one thing before I give the floor to my friend: the euro has never been as popular as it is in Europe and the euro area in particular. I think we are at 82% support and favorable view about our currency. 82% is not 100%, you always have people who are not pleased with it, but it is the highest we have ever seen.
Thank you. Yes, I am concerned with our country, with our society, the values we are sharing. Some of the concepts are self-defeating in an economic sense. Is it helpful to attract foreign investors to come to this country? Definitely not. They will be reluctant; they will shy away from doing business here. Yes, I'm concerned.
The last question to the Finnish TV broadcaster.
Thank you for the opportunity. You mentioned your childhood. According to studies, the ECB's monetary policy has benefited the wealthiest households disproportionately as rising financial asset prices have boosted their wealth. At the same time, as mentioned here before, political dissatisfaction is growing across Europe with both the far right and the far left gaining support. Does the ECB see a link between these two things? What can or should it do something about it?
Thank you very much. When we do our job as Governing Council, we are guided by what the treaty has asked us to do. What we have to do is provide price stability in the euro area. This is what is guiding us. By providing price stability, making sure we reach our target in the medium term, we are providing the conditions under which investments are made, under which employers hire. I remember my predecessor who was also faced with a similar question, who could report back that 2 million jobs had been created as a result of price stability. I would also mention that, as you probably know, we have entered the policy of reducing the size of our balance sheet, of letting bonds expire to maturity, and we are not buying bonds anymore. As a result of which, our liquidity pool has moved from 4.7 trillion down to 2.1 trillion. This has an impact as well. Thank you.
Thank you. That concludes our press conference today. Thank you for following us. The next will be the 29th of October in Frankfurt. Until then, all the best.
ECB President Christine Lagarde speaking in Berlin for the monetary policy they have once a year—it was outside Berlin. This is Bloomberg Open Interest. After that 25 basis point increase, as was expected, let's take a look at markets. We begin with yields. It is not just in Europe that we are seeing a rise in yields: two-year U.S. yield at 4.51%. That's after the PPI data this morning and as oil prices rise above $100 a barrel in the States. Brent crude above $105 a barrel now. Things intensifying across the world. We have the Nasdaq down, lower by about 1%; S&P 500 down half a percent. Several sectors are lower, including energy—it is actually holding things up. Energy is one of the few sectors in the S&P 500 that is higher right now. We have managed healthcare coming back from decline. The big news this morning is that we got the 25 basis points from the ECB we were anticipating. Markets are pricing in three more increases. When it comes to the U.S. inflation data, in some areas it was a little hotter than expected. Inflation is a problem around the world. Christine Lagarde was asked about global bond yields rising and she said it was a supply and demand issue and a fundamentals issue for various countries. It's also a United States issue and she specifically pointed to the fact that the U.S. is a large, liquid market and it was having an impact on yields around the world. Let's get to Berlin to Oliver Crook, Chief Europe Correspondent. We got the 25 basis points that were anticipated. Yields continuing to rise across curves in Europe.
That's right, Vonnie. It was a unilateral decision. It was highly anticipated by the markets—everybody on the planet—that they would raise rates at this meeting. The question was going to be the forward guidance. What we got for the new forecast for inflation and growth: both revised up to the upside, both inflation and growth. For this year, the average for CPI at 3%. Next year it will come down to 2.5%. The year after that it will be down at 2.1%. The last two years are revised upwards. Inflation will be higher for longer. For GDP, they revised the forecast up and for next year at 1.4%. What's interesting about the dynamic is, on the one hand, last time they raised interest rates they were revising the growth forecast down, inflation forecast up. That was the stagflation conversation in June. Now we are having a conversation about growth being more resilient, inflation more resilient than anticipated. You are now seeing repricing within the market in terms of what the expectations are for rates. Before this meeting, maybe they will hike in December, maybe not. Now you are getting a hike for December and a hike priced for February. We should give the market a little time to digest everything we heard over the last hour from the rate decision, the forecast, and the press conference. As we stand today, the headline is effectively that the inflation forecast will be higher for longer, growth more resilient, and for the ECB, this puts them in a tricky position. Today was almost the last easy hike. If you hike above 2.5%, you might be pulling the eurozone into restrictive territory.
Always great reporting, Oliver Crook from Berlin. Producer prices showed renewed inflation pressure from rising energy costs last month, potentially strengthening the case for a Fed hike next week. Let's bring in International Economics and Policy Correspondent Michael McKee. Is tomorrow going to decide what we hear from the Fed next week?
Tomorrow will pretty much decide what we hear after this morning. Oliver talked about giving the markets in Europe a chance to digest; U.S. markets have indigestion now after the PPI numbers. They don't show any progress towards disinflation: 0.4% rise leaves us at 5.4% on a year-over-year basis, which was more than forecast. The core is at 0.2% for the month. In both cases, they have moved up from what we saw in July. No progress there. Scott Bessent has been talking about having asymmetric information about what central banks are going to do. Maybe he knew the ECB was going to move. They did, to 2.5%, as we have been talking about. The odds of a rate hike in the U.S. shifted up to 69% after the PPI numbers; the odds of a Bank of Japan rate hike, 95%; the odds of an October rate hike, 69% for the ECB. We will see a rate move across the world, which should tighten things up and make things interesting going forward. That brings us to Scott Bessent's dare. He said, 'Go ahead and challenge me if you want. I have asymmetric information.' You look at what's happening now and he's wrong on two things so far: we are seeing oil prices and yields are moving the opposite direction from what he said is going to happen. The only thing that was not is the Japanese yen. If you look at the bottom right-hand corner, now it is moving against him as well. He may not be the house.
We will see what happens and have the buybacks this afternoon. What a range of events we are having. Let's bring in some of the talk about the impact on the market and investors: Head of Citi Global Wealth at Work, Kristen Bitterly. The European Central Bank thinks inflation is a problem and the risk is to the upside. Scott Bessent basically in the market.
It's basically one more data point you have. You saw within the probability, we went from more likely than not we would get a rate hike next week to essentially closer to 70%. This is what we thought all along. We believed there would be a 25 basis point hike next week and they should hike. Warsh was clear in his comments in Jackson Hole where he said inflation has been too high for too long. The idea previously where we had everyone trying to point to different sources: is it tariffs? Is it the Middle East? Is that going to pass? We are not seeing that. We have to take some action. A 25 basis point hike is a modest and strong signal to the market they are here to fight inflation.
Is the big risk that we have crude above $100 a barrel, it proves stickier than expected with the war in the Middle East? How does that impact the start of a hiking cycle? How are investors thinking about that?
I don't think it is one and done. We are favoring the hike next week. It gives more flexibility going into the end of the year. If you're hiking right ahead of midterms, that is your first hike in the cycle, that can seem more political. If you go back to what is driving the interest rate environment, what is driving the market more broadly, it is the fundamentals. There's a strong underlying growth story. Lagarde made comments to this regard. You are seeing resilient growth and accommodative rates. To that end, having one or two hikes from here to year-end is not something that is intended across the economy to maybe put the brakes on a little bit.
What about your clients? Post-Labor Day, we had the VIX about to hit 18 again, WTI above $100 a barrel, Nasdaq on a downslide, and yields bouncing—two-year at 4.51% and change. Are you getting calls?
Many clients have been overweight cash. Yes, absolutely. You can say: is that due to inertia or the fact that yields have been higher on a relative basis? You see some heavy cash positions, but it's also been that way for not just the past—
year, but probably the past couple of years. Okay, all this money will move from the sideline, but I'm looking at it saying, okay, we are on pace for the fourth gain for the S&P, or fourth-year gain for the S&P 500.
When you look at the earnings reports from Q2, they have not participated in that.
The question is, do we see a pullback, and how quickly does that get bought?
That's exactly right. September, even though it is my birthday month, it is not a favorite month for the markets. More importantly, we are seeing pullbacks as an opportunity. People have been underpositioned, but more importantly, if you ground yourself in the fundamentals, ground yourself in the earnings story, and try to look through the noise—and there's plenty, from oil prices to midterm elections—if we are going to continue to deliver earnings growth, we believe there is still a strong story to say that.
Kristen Bitterly, your birthday month.
From one September birthday to another, thank you to Kristen Bitterly. We will talk about tech. Wall Street watching Apple's pricing strategy. Good for affordability, but Jefferies and TD Cowen warning it could squeeze the profits. Let's discuss that with senior analyst who said it could fetch $28 billion in sales in the first year. When I look at this, are we really going to expect the foldable phone and these new lineups to really power Apple through 2027, or is it a flash-in-the-pan hope?
I would say sales growth is a simple thing. In any given year, sales are around 150 million phones. If you would expect only 5% to 6% of people embracing the phone, we are not looking for new users; it's the Pro and Pro Max users transferring up. You would see a 50% ASP increase just from a throwback to the duo. You will see an uplift in the average selling price. You may not see an uplift in units. We would be surprised if units go up in fiscal 2027 for Apple as a whole.
Anything yesterday people are talking about that maybe we are overlooking now that are huge sellers for Apple?
I was asking for people asking for the bigger price increase, a $100 increase across the board. The reason is because they have a very high margin services business. The gross margins are 75%. When you buy a new phone, an expensive phone, you get AppleCare, you will use payments, you have iCloud. All those things are businesses with 75% to 90% gross margins, depending on what you see. The services business offsets and cushions the blow for some of the rising costs Apple is seeing.
The big question goes to earnings after the bell from Oracle, pricing in a 7% move. Walk us through what we need to see. Can they do enough to get back into the good graces of investors? The stock has been lagging the entire market over the last year and change.
Oracle has been trading closely with the AI infrastructure names because that is where the company is right now. The AI cloud is what they are selling to the different enterprises or model companies—their cloud infrastructure business. That is the growth driver. We think it will be solid growth. We think the numbers are not as high as they should be. They could see a better growth rate for that. As far as Oracle is concerned, how are you going to fund this particular expansion? What do you need to do? More equity offering? Do more bonds? That part of the spectrum is where all the discussion is.
Thank you so much. Macy's shares are dropping after guidance underwhelmed, even with a strong earnings print. Romaine Bostick spoke with the CEO and joins us now. How is he feeling? He was doing well and suddenly this massive sell-off.
It's only about a 2% sell-off. The company basically put in six straight quarters of comp sales growth, a huge turnaround for a company that had been struggling. The concern among investors was, you look at Q1 and Q2, if you look at the guidance for Q3, there does seem to be some sort of deceleration in the growth. I had a chance to speak with Tony Spring this morning on the phone. He pushed back and said, in his view, on the stacked basis there is no deceleration. He thinks there is a bit more of an acceleration going into that. The way he measures those numbers internally are a little different than the standards we have here at Bloomberg and the standards of some folks on Wall Street.
You can crush expectations internally, but you have to deliver at the end of the day. The turnaround story gaining traction—what does the rest of the year look like if we are right about the state of the U.S. consumer?
The guidance does reflect the uncertainty, the macroeconomic uncertainty, gas prices. He said the tariff issue is stable, but the volatility associated with the tariff situation a year ago has moved out a lot. He says the consumer is resilient. When you look at their results, it's a company being driven by the more luxury Bloomingdale's brand. He pushed back on that as well. He said Bloomingdale's is luxury, but it has things at lower price points as well. Part of the strength of Macy's and the consumer environment is they are at all price points, from the lower-end goods you might find at their discount locations to Bloomingdale's.
The last time I went to Bloomingdale's, the sale rack was a $400 sweatshirt or jacket.
He's pushing the idea of doing more exclusive collaborations with designers. They had a big event at Herald Square two days ago where they showed off new designs from Hilfiger, Donna Karan, and Michael Kors—much more fashion-forward designers. It was interesting to see the mix. Are these exclusive? He's like, no, you have to come into a Macy's store or macys.com to get them. And they are looking to do more exclusive deals, more private brand deals to make the Macy's brand itself a destination.
And huge winners if they get them right. Talk about where they are closing stores and opening stores, because that is part of the turnaround strategy.
When Tony Spring took over, he started a three-year turnaround program called "A Brand New Chapter." That runway basically ends in February. What comes next? He's been vague about that, but he says they have closed a bunch of stores. The footprint total amongst their stores is 656. They will close a few more and renovate these reimagined Macy's stores. Those reimagined stores have been doing great. They are not only cleaner, fresher, brighter, better-trained staff. It's the stores that have not been updated yet that are still lagging and a bit of a drag on the sales growth and earnings.
It's partially the difference between carpets and tiles. It feels fresh and airy. If it is carpet, you are already exhausted.
They had a great collaboration with Ritz-Carlton. They have things like Starbucks in some of their stores. They are trying to make them more experiential and something fresh. The consumer, they are stretched, but if they can find something that is new and fresh and unique, they can sell that. That has been his recipe for success.
Tune into *The Close* later on, because Romaine will speak more about his interview with Tony Spring. That is at 3:00 p.m. After a whopping morning already, it is hard to believe it is not even 10:00 and we are already seeing WTI crossing $100, Brent was above $105, and a 25 basis point increase at the ECB. Coming up, Stephanie Aliaga on Fed rate hike bets. Plus, we will speak with Rob Arnott. This is Bloomberg.
We are 30 minutes into the trading session. What a morning we have had already, fully pricing in a rate hike. Brent surges as rising tensions in the Middle East heighten. Let's begin with some breaking economic data. We have existing home sales for the month of August. They come in as expected. That is not particularly good news. We have seen nothing but declines in new home sales and existing home sales for months and months because interest rates are high. Mortgage rates are only going higher and higher. That will only make it worse for the homebuilders. That is being affected, not a lot they can do about it. Expectations going into this tomorrow, ahead of the Fed meeting, what are you watching?
This will be the decision-maker. You can plug these components into the matrix. These were not particularly good. This was the only area that went down. That has a methodological change; I'm not sure how that will play out. The other bad news is energy prices went up. We saw diesel prices up by 22%. That only goes through the 11th of August. If you look at oil futures, you can see a massive change in the last month from where we were to what will happen. As we look at interest rates and what will happen, there is more pressure. To a certain extent, the bond market is telling us that right now. He said he will not worry; we're not really talking about that.
It becomes a question of do they come out again? They were saying earlier that for the 30-year, we hit that. If the Treasury is concerned about interest costs, and they are more concerned right now—a lot to keep an eye on. Thank you very much. You do not have time to refinance. Joining us now is the global market strategist. We want to start with that notion. How are you thinking about the macro and what this ultimately means for different asset classes and allocating capital in what seems to be a ticking time bomb? It feels like the signs are all flashing warning.
We are not so concerned about the increase we have seen in long-term yields. The reason why we are seeing these are very important. Markets are expecting that the U.S. economy will be growing more than it has in the last two years because of AI. You have this new normal. What is a bit worrying is if there is a bit of the term premium. If we got a hike next week, that might help to reestablish credibility in the Fed. So far the Fed has already moved the goalposts. That is really notable. They cannot just take for granted that inflation expectations are at 2%. They need to continue to justify those inflation expectations. That might mean getting started with rate hikes.
